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Monitoring and Evaluation of Production Partners

Last Updated: 2024.03.22
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Fast Retailing believes that respect for human rights and labor laws and improving labor environments are among our most important responsibilities. We created our Code of Conduct for Production Partners to serve as a guide in monitoring labor conditions.

Overview of Workplace Monitoring

Production Partner Monitoring Program

As per the Code of Conduct for Production Partners (established in 2004), Fast Retailing monitors the compliance status of all garment factories, core fabric mills and core spinning mills through workplace monitoring as of 2023. As part of this monitoring, we have implemented unannounced audits by third-party entities and assessments using frameworks common to the apparel and footwear industry. Using these methods, we evaluate working environments at factories, and engage in improvement activities appropriate to existing risks. In addition, we conduct pre-production audits of garment factories before we start business with them. This enables us to screen factories and start improving working environments from an early stage.

In 2023, to strengthen human rights due diligence and mitigate risk in our supply chain, we concluded our Code of Conduct for Production Partners, not only with garment factories and core fabric mills, but also with core spinning mills. We will continue confirming working environments by sending company employees to visit raw material procurement locations, commissioning third-party inspections, and through third-party certification.

In 2015, Fast Retailing joined the Fair Labor Association (FLA) which has provided support in adopting FLA labor environment standards throughout the entire supply chain, evaluated our monitoring activities related to labor conditions, provided guidance for improvement, and encouraged us to dialogue and engage with stakeholders, including member brands, factories, and Civil Society Organizations to tackle issues related to labor conditions. In February 2019, the FLA accredited the Fast Retailing's social compliance program. Participating companies with accredited social monitoring programs have demonstrated that they have the systems and procedures in place needed to successfully uphold fair labor standards throughout their supply chains. The FLA assesses a random sample of member brands' factories each year to ensure fair labor standards are maintained. In FY2023, FLA assessed four of Fast Retailing's garment factories.

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Pre-production Audit for New Production Partners

We conduct pre-production audits of garment factories before we start business with them. This enables us to screen factories and start improving working environments from an early stage. We only commence business with those partners confirmed to meet standards through pre-production audits, and which have signed our Code of Conduct for Production Partners. During fiscal 2023, we initiated business relationships with all of 70 new production partners that undertook pre-production audits. This includes two factories that failed an initial audit, but where corrections were confirmed through a follow-up audit.

Approval Process for New Factories

Approval Process for New Factories

Workplace Monitoring for Existing Production Partners

Fast Retailing monitors the compliance status of existing production partners as per the Code of Conduct for Production Partners.

Workplace Monitoring System*

Factory monitoring process

*The evaluation and improvement flow of factories which participate in the Better Work assessment program are not included in the above.

Methodology

Traditionally, factories have been subjected to multiple audits, each performed as part of the discrete programs of several buyer brands, which impeded factories from making improvement effectively. Fast Retailing has been working to transform our monitoring program to ensure our standards and to encourage factories to independently strengthen their management system of the working environment with their own initiatives.

Along with unannounced audits by third-party entities, we use the assessment tool of the Social and Labor Convergence Program (SLCP), an industry-wide Converged Assessment Framework, as well as audits under the Better Work system, a program managed jointly by the International Labor Organization (ILO) and the International Finance Corporation (IFO). By combining these methods, we evaluate the working environments at factories against our own standards, and engage in improvement activities.

In FY2023, a total of 616 audits* were carried out for garment factories and more fabric mills.
* Total number including SLCP third-party verifications, Better Work audits and unannounced audits by third-party entities

SLCP Assessment

SLCP is an organization that has developed and provided a common framework across the industry. SLCP assessment and verification are carried out through the Higg platform using the Facility Social and Labor Module (FSLM). On the platform, the factory and brand can check factory assessment results and scores, using a scoring methodology that has been developed by the Sustainable Apparel Coalition (SAC). A factory conducts self-assessment using the SLCP assessment tool, receives verification by a third-party body, and proceeds to improvement process. The SLCP assessment tool contains many indicators which can be utilized to strengthen management systems such as policies, organizations, documents on internal processes, and the review and improvement of processes. The conventional monitoring program was audit-centric and tended to focus on corrective actions for issues found in audits. Now, factories are expected to establish a cycle of identifying issues in the working environment, then executing improvement actions through their own systems. A factory can share their verified SLCP data with multiple buyers, therefore reducing the number of audits they must complete throughout the year.

An assessment using the SLCP framework is conducted annually in principle. Factories perform self-assessment and third-party verification in accordance with the SLCP protocol. Production partners defined as low risk (based on past audit and assessment records, cases received from the FR Hotline, and how these grievances were resolved) may be switched to a 24-month self-assessment and verification cycle instead. In verification, a Verifier Body visits a factory, interviews workers, trade union members, worker representatives and factory management, reviews collective bargaining agreements and various records, and checks occupational health and safety through onsite inspections. Fast Retailing receives a verified assessment report and evaluates this in line with our Code of Conduct for Production Partners.

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Better Work Audit

As part of our monitoring program, we began performing audits under the Better Work system in 2015, which is a program managed jointly by the ILO and the IFO. Adopted widely in the apparel industry, Better Work monitoring eliminates duplications in factory audits, letting companies focus mainly on improving labor conditions.

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Unannounced Audits by Third-party Entities

Factories which are not in the scope of SLCP and Better Work programs are subject to unannounced audits by third-party entities. These third-party audits are conducted annually in principle. An auditor visits a factory, interviews workers, trade union members, worker representatives and factory management. Auditors review collective bargaining agreements and other records including contracts, pay slips, attendance records and timecards, and conduct an onsite inspection of occupational health and safety conditions. Dormitories are also checked during the audit, and where appropriate, workers may be interviewed at dormitories. At the opening and closing of the audit, worker representatives and trade union members are invited to attend, to reflect the voice of workers in the evaluation.

Audit Items and Evaluation

Fast Retailing has a zero-tolerance policy for issues that seriously violate human rights. The issues that fall under the zero-tolerance standard are child labor, forced labor, coercion and harassment, discrimination, serious violation of freedom of association, underpayment of minimum wages and falsification of records. When any such violations are found, factories are required to remedy the matter immediately. In addition, matters resulting from inadequate management of working environments are categorized as serious issues. If a serious issue is identified, we urge the factory to make early improvement.

• Major zero-tolerance issues:
Child labor, forced labor, coercion and harassment, discrimination, lack of building safety, serious violation of freedom of association, illegal or unjustified dismissal of workers on strike, retaliation against employees who raised grievances, non-payment of wages, non-payment of minimum wages, lack of emergency preparedness (especially fire safety), transparency issues such as false reports, bribery, wrong reporting of the audit scope of production areas, unauthorized subcontracting and use of homeworkers

• Major serious issues:
Insufficient payment for overtime, no legal leave provided, non-payment during work stoppage, non-payment of social insurance premiums, long working hours, no legal breaks provided, no employment contracts or incomplete contracts with employees

In addition to zero-tolerance and serious issues, factories are audited against a wide range of items described in the Code of Conduct for Production Partners, such as health and safety for workers, wages, and benefits, working hours, grievance mechanism and care for socially vulnerable groups common in apparel supply chains, including female workers, foreign migrant workers, young workers, and any minority groups.

We evaluate and grade factories based on the results of our workplace monitoring program and disclose evaluation results every year. Please see the results of workplace monitoring here.

Corrective Action Measures

If a zero-tolerance issue is found, or a serious issue is again found after a previous assessment, the matter is escalated to the Business Ethics Committee, which determines whether to terminate or review our business relationship. In parallel, we discuss measures with the factory and monitor them until improvement is completed. The Business Ethics Committee considers the potential financial impact on the factory as well as to worker employment, and makes recommendations on the business relationship to the Production Department. We may terminate business when remediation of a serious issue is not validated in a follow-up audit. Fast Retailing strives to avoid such scenarios by closely monitoring factories and preventing serious issues that may lead to contract review or business termination.

If a serious issue is identified, we urge the factory to make early improvement. Fast Retailing employees visit the factory within a certain timeframe, dependent on the severity of issues, to urge the factory to implement systems that prevent the issue from recurring. We confirm such preventive systems have been established in the next annual assessment.

Fast Retailing's Monitoring Program Manual and Supplier Guidebook include the remediation process, timelines following the completion of assessments at the factories and root cause analysis. Additionally, we provide guidance and resources for factories to understand various root cause analysis methodologies, including the FLA's guidance on root cause analysis, so preventive measures are set. Overall audit results and most-frequent findings are communicated with our production partners and internal procurement-related departments at each of our brands.

Subcontracted Factories Audits

Fast Retailing strictly prohibits production at unauthorized subcontractors in our Code of Conduct for Production Partners. We also check if a garment factory uses only authorized processing factory as part of the annual assessment process.

Our garment factories are required to audit subcontracted processing factories to which they have outsourced a part of their production processes and receive approval from Fast Retailing. Processing factories undergo the audit every year. If any zero-tolerance issue is found in the audit, the processing factory must remediate it within a timeframe agreed upon with Fast Retailing and pass the follow-up audit.

Workplace Monitoring Results

Results of Workplace Monitoring

The results of fiscal 2023 workplace monitoring are as below.

Zero-tolerance issues identified include interference with freedom of association, insufficient actions against harassment, excessive working hours for young workers, issues related to calculation of leave, and payment of recruitment fees and other costs borne by migrant workers. In FY2023, we tightened standards regarding discriminatory treatment of migrant workers, who are often more vulnerable. We classify costs to migrant workers, such as recruitment fees, travel expenses, and passport renewals as zero-tolerance items, and require partner factories to follow strict standards. As a result, the number of zero-tolerance evaluations rose to 14 factories. We agreed on improvements with these factories and confirmed implementation at 10 factories by the end of February 2024. Of the four remaining factories, two factories are still working on the improvements, while Fast Retailing terminated business with the two remaining factories.

Important issues observed include "wages and benefits" issues related to the calculation of overtime payment or other allowances (55%), "working hours" issues, including long working hours and insufficient management of working hours records (19%) and "recruitment and hiring" topics, such as incomplete contracts. We agreed on improvement plans with all of 85 factories that received an "important issues observed" evaluation for a total of 191 violations, and Fast Retailing employees visit these factories to check progress of improvements.

The most frequent violations of the Code of Conduct for Production Partners found in the workplace monitoring are categorized in the areas of health and safety and working hours. We have engaged in improvement through the following initiatives.

Health and Safety

In order to secure health and safety at production partners, Fast Retailing conducts regular training for suppliers on local fire safety standards, new local law requirements, and good practices of health and safety management etc. When the Sustainability department visits a factory, we always check onsite if proper fire protection is in place and require immediate improvement when an issue is found. Issues in health and safety vary and include fire safety, occupational safety and chemical management. We require factories not only to address individual issues, but also to establish preventive systems such as designated teams to manage occupational health and safety and to perform regular check-ups of fire safety and building safety.

Fast Retailing signed the International Accord for Health and Safety in the Textile and Garment Industry (formally Accord on Fire and Building Safety in Bangladesh), aimed at protecting workers in garment factories from building collapse and fire.

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Working Hours

We not only monitor working hours during audits and follow-up audits, but also have strengthened internal, cross-department collaboration among the Sustainability and Production departments to address the working hours issue at our core garment factories under our clear policy to prevent excessive working hours.

In order to reduce working hours, we noticed that factories took various actions to increase productivity: investing in factory automation, optimizing production planning, training workers so they can be more skilled and adapting the compensation scheme to worker efficiency. The Production department also requests factories to forecast excessive working hours and inform us so that our production planning can be adjusted when possible.

Fast Retailing has established a responsible procurement policy to ensure the placement of orders according to procedures which aim to maintain a fair work environment and uphold the human rights of workers. To promote responsible procurement, we have formulated guidelines that are in line with the procurement operations of our core brands. We conduct a yearly survey to collect feedback from core suppliers and conduct hearing sessions to understand if our procurement practices could hinder factory efforts to reduce overtime hours. Supplier feedback is evaluated by our Production and Sustainability departments to agree on actions that will address the root cause of overtime hours in factories experiencing difficulties.

The Production department follows up with factories to identify the root causes and creates an improvement plan. The Production department then collects the actual weekly working hours of all employees in those factories every month so as to monitor the situation.

The Sustainability department monitors the factories' implementation of their improvement plans and at times will verify working hours' data on site. Regular internal meetings are held to follow-up on the progress of core factories. At the same time, our Sustainability department supports factories through close follow up, sharing best practices to improve compliance with local laws on worker wages and benefits, and to secure worker income in times when working hours are reduced.

Even though we have noticed improvement at the majority of core garment factories, we will continue to monitor and provide support when necessary.

Monitoring Program Improvement

We evaluate the effectiveness of our monitoring program by analyzing the results of annual assessments. Based on this analysis, we set clear goals to reduce issues and improve scores in key focus areas such as health and safety, wages and benefits, and working hours.

The Fast Retailing Hotline for factory workers is an important tool to identify any potential new issues in between these assessments. At least twice a year, trends and risks identified through the monitoring program and other initiatives are reported to management, including critical issues relating to salient risks, country and region-specific risks, as well as support and improvement status at high-risk factories. These matters are escalated to the Human Rights Committee and/or Sustainability Committee as required.

In addition, we work to improve our program through third-party expertise and input. This includes comments and advice from FLA as well as learnings from independent industry programs, such as Better Work. For example, analyzing worker grievances made through the Fast Retailing Hotline helps us improve our monitoring program and strengthen our production partners' own grievance mechanisms, assisting factory management to detect, investigate and rectify issues.

We also analyze cases of non-compliance with the Code of Conduct for Production Partners by country and by individual brand, including how many facilities are passing or failing annual assessments. We have developed country-specific strategies for major production countries and each country's priorities have been defined through stakeholder engagement and aligned with business strategies.


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